Tip lines essential in preventing worker misclassification: Study

Misclassifying workers as independent contractors is a continuing problem countrywide, where some of the worst consequences of misclassification — from failure to pay unemployment insurance to failing to procure workers compensation insurance — have the greatest impact on state coffers, according to a Harvard University study released Tuesday. 

Yet over the past two decades, many states have taken “considerable” measures to root out and stop misclassification and payroll fraud, including adopting legal tests to gauge whether a worker is an independent contractor — yet more work is needed, the study states.

One leading method of discovering misclassification are state tip lines, according to the study. Sixty-one percent of the agencies surveyed have a telephone tip line and 86% indicated that they have a method to report violations through the internet.

Cambridge, Massachusetts-based researchers with Harvard Law School Labor and Worklife Program surveyed officials with labor agencies in 27 states, conducting in-depth interviews with officials in nine states.

The report highlighted the states’ experience with San Francisco Uber Technologies Inc., which was investigated by the Alaska State Department of Labor and Workforce Development in 2014. The department “determined Uber drivers were employees but the company did not go to a hearing,” according to the report.  

Uber settled for a penalty of $78,000 for unpaid workers compensation insurance but admitted no wrongdoing, the report states. In March 2015, Uber simply eliminated its service in Alaska. Two years later, however, Uber and Lyft lobbied the state legislature and got them to pass a law stating that the drivers were independent contractors, the report states.

“As in many other states around the country, Uber relied on its political resources and growing popularity to define “transportation network drivers” as exempt from employee status coverage,” according to the report.

Researchers found that success in catching misclassification is present in states that have adopted the “ABC test,” either broadly or in a limited fashion. That test assumes that workers are employees unless certain conditions are satisfied, such as whether the work “is done without the direction and control of the employer; is performed outside the usual course of the employer’s business; and is done by someone who has their own, independent business or trade doing that kind of work,” according to the study.

Massachusetts adopted this test by statute in 2004, and New Jersey's Supreme Court adopted the test for wage and hour laws in 2015, as it was already part of unemployment insurance laws. In 2018, California’s Supreme Court mandated use of the ABC test in its Dynamex Operations West Inc. v. Superior Court of Los Angeles County decision. Other states have partially adopted the ABC test. For example, New York has largely incorporated the ABC test for the construction and the commercial goods transportation industries, according to the study.  

Among the agencies in our survey, 29% reported that their priorities were driven solely by complaints while 71% said their investigations were based on a combination of responses to complaints as well as agency investigations, according to the report.